Sovereign wealth funds, the fastest growing entities in the financial world, have generated much concern in both developed and developing nations, including India.
Lack of regulation and high opaqueness in the functioning of sovereign wealth funds have made many countries suspicious about intent behind investment moves of these funds.
The real fear of these countries seems to be foreign control of local companies.
Recent move by the International Monetary Fund (IMF) to get these government-backed funds agree to a set of guidelines and a code of conduct is no doubt timely.
In early September, IMF evolved guidelines for these funds and it will now be presented to members in October. The guidelines cover issues such as transparency, governance, and accountability of these funds.
However, how effective IMF’s efforts will be is not clear, not only because details of the agreement are not available but also because some of these funds may not want to give up their secretiveness.
Sovereign wealth funds are government-created and government-backed vehicles to commercially deploy in other markets the large pool of reserves many countries have built from their oil and other exports.
The large asset base of some sovereign wealth funds is indicative of their financial power. In the past few years, they have grown fast and now control assets worth an estimated $2 trillion-3 trillion, which is expected to increase further to $10 trillion-12 trillion by 2012.
Largest of these funds are owned by West Asian oil producing countries, other oil producers such as Norway, and big Asian exporters such as China and Singapore.
In recent years, oil-rich West Asian nations and Russia as also large exporters such as China have been deploying part of their huge foreign exchange reserves in sovereign funds as investment vehicles that have grown significantly in size.
According to Thomson Reuters data, sovereign funds invested $25.5 billion so far this year to buy stakes in global companies such as Citigroup and Merrill Lynch, up 66 per cent from a year ago. But countries where these funds invest are worried that such investment may ultimately lead to acquisitions of companies by these funds.
In a speech in Santiago, Chile, earlier this month, IMF First Deputy Managing Director John Lipsky recognised the feeling of discomfort among nations with such funds and urged government-run investment pools to accept principles of accountability and transparency put forth by his organisation.
The guidelines will allow the funds to “reduce concerns and thereby help mitigate the risk of protectionist pressure on their investments and restrictions on international capital flows,” he said. According to the IMF, the body is at the centre of a global debate about how sovereign funds manage their $2.5 trillion assets, as oil wealth accumulates and officials in countries receiving their investments worry about national security.
Ambitions of these funds are as large as their cash base. But some of their moves have boomeranged. The proposed buy of P&O’s US port generated a lot of unfavourable publicity for sovereign funds and raised issues of security. India had a similar case when Singapore-based funds tried to take a stake in ICICI Bank.
Many rich nations, including Germany and the US, have also expressed uneasiness these funds may be investing in their economies for political purposes.
There is no doubt that large resources of these funds can be of good use to some of the developing nations. On the face of it, the world should benefit from growth of wealth funds that re-deploy surpluses of some countries.
